Amazon Online Sales Tax: Will it Save The Retailers?

Amazon.com, Inc. (NASDAQ:AMZN) is supporting the measure of the majority of States to collect online sales taxes from consumers, despite opposition from its fellow online retailers including eBay Inc. (NASDAQ:EBAY) and Overstock.com, Inc. (NASDAQ:OSTK).

According to Wall Street Journal, most Republican governors changed their position regarding the implementation of online sales tax. They joined their Democratic counterparts in negotiating with Amazon to collect state taxes. New Jersey governor, Chris Christie, recently announced that the online retail giant agreed to collect online sales taxes for the state. In return, New Jersey will allow the online retail giant to expand its distribution facilities in the state.

According to Gov. Christie, the issue regarding online sales taxation is significant to all governors across the United States. He also expressed endorsement for federal legislation that would provide all states the power to impose taxes.

Brick and mortar retailers such as Lowe’s Companies, Inc. (NYSE:LOW) welcomed the move of Gov. Christie. Lowe’s vice president, Scott Mason, said that Christie’s position regarding online taxes provided comfort to other Republican leaders who are hesitant to promote online sales tax as a fair measure to help ease their states’ budget crisis. Mason also emphasized that Lowe’s experienced 5 percent to 10 percent disadvantage when consumers order products online to avoid sales tax.

David French, National Retail Federation senior vice president of government relations, also voiced the same opinion. According to him, brick and mortar retailers are losing sales from their online competitors because their prices are lower. French also speculated that Amazon’s decision to give in and collect online sales taxes is due to the changing business model of the online retail giant. According to him, Amazon wants to expand its distribution facilities to achieve its objective for a more rapid delivery.

In 2011, Amazon supported the Marketplace Fairness Act proposed by senators Mike Enzi (R-Wyo.), Dick Durbin (D-Ill.), and Lamar Alexander (R-Tenn.). The bill aims to provide authority to states to collect taxes from online retailers. The company believed that national legislation regarding online sales tax is a “win-win resolution” because it will allow states to increase their revenue without implementing new taxes or federal spending.

On the other hand, Ted Cohen, vice president for government relation and general counsel of eBay, described the Market Fairness Act as “another Internet sales tax bill that fails to protect small business retailers using the Internet, and will unbalance the playing field between giant retailers and small business competitors.”

According to analysts, the implementation of online sales tax collection will most likely change the shopping behaviors of consumers. There is also a great chance for brick and mortar retailers such as Wal-Mart Stores, Inc. (NYSE:WMT), J.C. Penney Company, Inc. (NYSE:JCP), The TJX Companies, Inc. (NYSE:TJX) and many other retailers to increase their sales, because it will close the gap of their price disadvantage to e-retailers. For example, prices for Amazon’s products are currently 12 percent lower than Walmart. If a state will implement 8% online tax, there is a great chance that the price gap between Walmart and Amazon will become 3%.

Additionally, Amazon itself has very low margins. A sales tax of 7% or 8% for New Jersey/ New York would hurt the company’s bottom line or force Amazon to raise prices. For the year ending 2011, Amazon had $48Billion in revenue, on which the company earned $10.B in gross profit. Earnings before taxes were$930M with taxes coming in at $290M for net income of $630million. Using back of the envelope numbers we will say taxes will be 5% higher due to state sales tax. Taxes would come in at $304 million. While the increase of $14 million does not seem like much, for a company with low margins like Amazon it adds up. Low margins would go down even further.

The majority of brick and mortar retailers had been complaining that the level of the playing field in the retail market was unfair, since online retailers do not charge sales tax to consumers. Shoppers who used to buy online because they want to avoid paying taxes, will most probably return shopping practices in stores.